L. Ljungman
Lennart Ljungman is senior forest economist for the FAO/World Bank cooperative Programme in the FAO Investment Centre.
This article describes some recent experiences from the ongoing reform process of the forestry sector in countries of central and Eastern Europe during the transition from centrally planned to market economies. Institutional changes are needed to facilitate: planning, management, extension and administration; pricing; legislation and control; and human resource development. In view of the relatively short period of such experiences and the diverse conditions in the countries concerned, the recommendations presented must be considered tentative.
Lopping oaks in Albania where they are primarily used for fodder
In a centrally planned economy (CPE), the forest resources are owned and managed by the state through a state forest service. Planning is carried out centrally by administrators, with limited input from technical staff whose role is mainly to implement the plans. Forest products are processed and marketed by state enterprises. The financial resources for investment in and maintenance of the forests are typically allocated through the state budget, and the revenues (or losses) are retained by the state. All rules for transactions between the state enterprises, and prices to the end-user, are determined by the state planning ministry.
Under the contrasting system, based on market economic conditions, resources can be either private or state-owned and are managed by the owner (private, communal, state, church, etc.) to meet individual goals, but within certain established rules. The productivity of the forest and the processing of forest products is based on free competition between enterprises, whether private or state-owned. Raw materials are marketed through free competition or negotiated prices between forest owners and the processing industry. In some cases, the wood processing industry owns forest land so that it can secure raw material supply and have an influence on the cost of these raw materials.
In the transition from centrally planned to market economy systems, particularly in the initial stages, careful consideration needs to be given to the fundamental revision of the laws and regulations controlling forestry development, together with the ownership of forest resources, logging operations and processing of forest products, in order to avoid an excessive shift towards maximizing individual benefits to the detriment of society.
A particularly important issue in the transition from centrally planned to market economic conditions concerns the privatization of natural resources. There has been a strong trend towards privatization of agricultural land and towards a gradual privatization of industries. However, the situation has not been as straightforward with regard to forests and other natural resources, for example mines and oil fields. The argument has often been made that they should remain under state control in view of their value to society and the importance of ensuring their long-term sustainable use. In fact, the privatization of state - owned forests has been very limited so far and, where forest land has been privatized, it has often been based on equity considerations, resulting in the allocation of such small plots to individual owners that rational forest management may be compromised (e.g. Romania). Therefore, the question of privatization in forestry should not be taken as a given when discussing a move towards overall market economic conditions. In this regard, it is noteworthy that forestry remains solidly in the control of the state in most developing countries.
There is great pressure on the former CPEs to make the "leap" to market economies. Political decisions on policy and institutional changes are often taken hurriedly and under pressure, without the various options in terms of policy decision and their likely impacts on the forestry sector as a whole being sufficiently examined. This article describes some recent experiences which, beyond their general interest, could be of particular value to forestry professionals in countries involved in the transition process.
Planning and management
The CPE system, by definition, relies on central planning and, in theory, should permit a multisectoral perspective. However, in practice, this has been difficult to achieve.
The management of state forests in East and central European CPEs is usually based on forest management plans prepared by a central institute. For example, in Albania the central institute (the Forest and Pasture Research Institute) has specially trained staff who prepare plans, normally every ten years, for each management unit (about 3000 ha). These plans are based on detailed inventories and the application of central guidelines on management, which include measures to achieve an even age distribution in each management unit.
The forest management plan system has the advantage of being based on a detailed and thorough database and facilitates new policies being applied consistently over the whole country. However, the local and technical knowledge of the field staff is not properly utilized; when those who have to implement the plan have not been adequately involved in its preparation, they are less likely to implement it as stipulated. This leads either to "mechanical" implementation, with a lack of adjustment to suit local conditions, or deviation from the plan, which defeats its purpose. In Slovakia, for example, more wood is harvested outside than as part of the areas covered by management plans.
A globally recognized fundamental element in forest management, the annual allowable cut (AAC) is defined as the amount of wood that can be harvested each year without repercussions on future sustainable production. Increased decentralization in the preparation of the forest management plans for state forests, and the emergence of non-state forestry, could lead to the need to reconsider the present system of calculating the AAC. At present, in CPEs the national AAC is generally established as an aggregation of all prescribed harvesting in the units of the forest management plans. Under decentralization, it will no longer be possible simply to aggregate the management plans of the various forest areas, as they will be prepared with different criteria. Therefore, a strong central body for resource assessment and inventory will be even more necessary than in the past. Remote sensing technology, using the detailed inventory undertaken during the preparation of local forestry management plans as "ground truthing", will be one cost-effective option for such a national inventory as a basis for the AAC calculation.
Oak feat fodder bundled at the base of a tree in Albania
Extension
The privatization of forest tenure will create a need for forest extension services to provide technical expertise and communicate research results to the new owners or users of non-state forests, and for the introduction of a control system to ensure that the forest law is followed. Four options appear possible: i) through services provided by the state forest service; ii) through adding a forestry programme function to the agricultural extension service but with the control function remaining with the state forest service; iii) through a separate state forest board, providing extension and control; or iv) through a private extension organization in combination with a control function by a state forest service or board.
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Slovakia In Slovakia, private forestry is more important than in other former CPEs, and arrangements for private forestry are therefore more advanced. The reason for the increased proportion of private forest land is that the legal title to forest land was not taken away from the owners when communism was introduced; only the usufruct was transferred to the state. Now, the original owners have been given back full rights to the land. The size of these forest holdings is often quite small, particularly after partitioning at inheritance. Their management is regulated by the forest law: this includes the provision that all forests must have management plans and that they must have a forest management professional, either for each unit or for a group of units. The forest management professional may either be privately employed or be provided at cost by the State Forest Service. The law includes a provision for financial incentives for these arrangements. This method of ensuring forest management may remove the comparative advantage of low administrative costs of smallholders - a constraint common to many small West European forest owners. The control of the implementation of the forest law in Slovakia is vested with the State Forest Boards, which are independent from the State Forest Service, and have their own offices in each district. They have to approve forest management plans both for state and private forests while ensuring that the plans are properly implemented. |
Robinia pseudoacacia used to reforest end stabilize sandy soils in Romania
So far, most countries have followed the first option, presumably to avoid too many initial changes, which would overstretch capacities and increase costs, but also because in most cases the state has longer term multiple objectives while the private owner is likely to be more concerned with shorter-term economic profitability. The second option could lead to cost savings by utilizing a large agricultural extension network. However, because agricultural extension in the former CPEs is in an early stage, this option is not likely to be chosen now. In addition, there is the risk of forestry being given only marginal attention. The third option is the most common model in Western Europe. The last option may be a future solution at least for certain types of forest owners. In Slovakia, for example, the Non-State Forest Owners' Association is currently initiating services to groups of landowners on a commercial basis.
Incentives
In most West European countries, incentives are provided to forestry to stimulate long-term wood production. For example, in Sweden the state provides incentives for afforestation of marginal agricultural land. It is interesting (and ironic) to note that, even though such incentives are the rule rather than the exception in Western Europe, many financing agencies, including the World Bank, resist incentives (subsidies) for forest regeneration on the grounds that they distort the allocation of resources. Because of the long gestation periods in temperate forests, investments in regeneration result in a low financial rate of returns when traditional economic methods are applied. However, looking at this from a national point of view, regeneration could be seen as a prerequisite for the sustainable harvesting of existing forests, i.e. the planting of trees could be seen as an integral part of harvesting. Seen in this way, the return to the economy is immediate. In other words, the private owner who is planting trees may have to wait 100 years for the return on his investment, but the nation enjoys the immediate income from an increased AAC in existing forests, something that would not have been possible if the private owner had not planted trees. This could be used as an argument to justify "subsidized" forest regeneration.
Administration
The forestry administrations in the former CPEs were in charge of all functions regarding forestry, including policy guidelines and management of the forestry estate, as well as providing the control function for the implementation of the forest law. They were operated as government departments, following cumbersome administrative procedures and with all or most revenues being retained by the state. In most West European countries, the state forests are managed by an autonomous state forest enterprise. For example, in France the state forests (and many communal forests) are managed by the Office National des Forêts, a state-owned but autonomous entity. The autonomous state forest enterprises in West European countries are usually responsible for the management and control of the state forests, collecting and retaining revenues to be used for maintenance, management and reinvestment for the sustainable production of forest ecosystems. It is fully accountable for the costs and benefits and the management of the forests according to guidelines and rules established by the ministry concerned. The key to the balance between socio-economic and environmental concerns is a package of well-defined laws and regulations to set the frame within which the autonomous state forest enterprise is allowed to work.
This administrative arrangement offers good potential also for former CPEs. On the other hand, the functions of intersectoral coordination as well as overall control of policy implementation should be retained within the ministry responsible for the forestry sector.
The transition to market economic conditions makes it possible to decentralize planning and management functions, thereby making better use of technical and local knowledge. More involvement of local staff and their knowledge of specific situations in the preparation of forest management plans, combined with increased accountability for the end result, could substantially improve efficiency and facilitate adjustment to market economic conditions. An essential prerequisite for this is the delegation of financial responsibility and accountability to the staff responsible for implementing the plan. Increased authority to take technical decisions and increased responsibilities for the financial consequences of those decisions can lead to increased efficiency through a balance of "rewards" and "punishments" (see Box on Poland).
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Poland In Poland the General Directorate of State Forests is largely a self-financing entity, with direct technical, administrative and financial responsibility and accountability for managing the state forests. Each of its regional offices has a budget allocation for its work programme and full responsibility and accountability for its implementation. The allocation is based on self-generated revenues from the forests, complemented by state funds for certain activities such as afforestation of farmland. The regional offices receive their allocations on the basis of average costs for proposed activities. If they can accomplish the tasks at lower - than - budgeted levels, they have the freedom to use savings for other purposes, including incentives to staff. This has fostered a high staff commitment and improved work efficiency. |
A government organized, export - oriented willow basket enterprise in Romania
Pricing
Experience has shown that it is difficult to allocate resources, determine forest management practices and supply products that satisfy preferences without an appropriate pricing system that reflects those preferences. In fact, one of the main shortcomings of CPEs is their lack of a free pricing system which reflects the interaction between supply and demand of productive resources. In the CPEs, pricing has not been used as a tool to improve efficiency in forest operations. Pricing in CPEs has adapted to conditions where the price of wood products is only a transfer payment between government departments or enterprises. Prices have thus been artificially determined and the true costs and losses or profits are rarely, if ever, seen. For instance, in the CPE of Belarus, the price for road transport was below costs. This resulted in wood being transported past one industry to accommodate planned delivery in another industry. Because of the low price of transport, the distance to the mill was not an important factor in the allocation of wood to the industry. A free market price would increase the unit cost of transport and would therefore result in more local processing, which would lower total transport distance and economic costs. In other former CPEs, the forests were harvested through methods using large machinery because their real costs were not considered. Furthermore, these heavy machines cause damage to trees and, since the CPE prices do not properly reflect the lower wood qualities, this logging system was not reconsidered.
Efficiency in forestry operations is likely to increase with the introduction of a system where there is free competition for all - state, enterprises or individuals - to provide goods or services. But how should free market prices be introduced? In CPE systems, all activities such as silviculture, harvesting, road and building construction are carried out by state employees. This system has to be reconsidered. To reduce costs, free competition must be allowed for these activities. The tasks should be defined so that many bidders are attracted, particularly local small-scale operators who may have lower overhead costs. Through a tendering procedure, the bidder with the lowest price and adequate specifications for the job will be awarded the task. In Poland, the introduction of logging by small local contractors has led to substantial reductions in the permanent labour force and, most important, to a reduction in logging costs, while generating employment opportunities.
The proper level of income from forestry is to a large extent dependent on a pricing system that adequately reflects the value of different qualities of wood and non-wood products. Entrance into the market economy calls for a review of marketing arrangements of both wood and non-wood products to ensure that the government is receiving the fair value and that distortions in the allocation of resources are avoided.
In the CPEs the wood was sold at an established stumpage price to the state processing industry or an intermediate state harvesting enterprise. This stumpage price, apart from not adequately reflecting the market value, did not reflect the cost of forest management and was not high enough to generate sufficient income to cover costs. There are two main options to improve this situation. Either the wood is sold standing through a tendering system, or it is sold harvested at the roadside. The former system is suitable when there are many buyers who are experienced enough to be able to prepare proper tenders reflecting the quantity and quality of the wood offered for sale. Roadside selling offers better control of illegal felling and environmentally sound practices as a result of the control performed by the state forest service. Selling through concession contracts is not recommended, since it is likely to result in a lower financial return to the landowner and to compromises on sustainable and environmentally sound production.
Legislation and control
Forest legislation provides a framework both for safeguarding sustainable forestry and for arrangements to promote sound forest management. The CPEs in transition invariably have had to revise their forest laws. This has to be done to accommodate the shift of responsibilities as a result of transition, including a new distribution of roles and responsibilities between the state and the private sector, including local communes or communities. The possible privatization of state forest land, or the restitution of land titles to former owners, requires special attention in forest policy and legislation. Privatization of state forest resources must also be considered in the legislation, as it refers to the possible consequences on the long-term sustainability of the forest ecosystem and of the supply of social and environmental goods and services, which are important for the nation and special interest groups. An intermediate solution may be the privatization of forest operations on public forest lands through appropriate contractual arrangements, but with the state maintaining ultimate control of the land.
With control of trees and forest resources no longer fully vested in the state, there may be more need to establish methods to ensure avoidance of abuse. But the question is whether such control should be implemented through strict rules and/ or through a system of incentives. In other words, the control can be imposed by the "stick" and/or the "carrot".
Natural regeneration of spruce under beech in a protected area of Albania
Replanting fir (Abies sp.) in an acid rain-damaged area of Slovakia
There is a tendency among the former CPEs in favor of strict enforcement of forest law by a special police force. For example, Albania has requested assistance from the World Bank to support a forest police force modeled on the Corpo Forestale in Italy, with a mandate to protect the forests through enforcement of forest and civil legislation.
There are other ways of controlling the forests, however. In the United Kingdom. for instance, there is no specific forest law but there is a whole framework of financial incentives for forest activities, with specific "strings" attached, thereby regulating those activities. In Finland, the forest law regulates what can and cannot be done in private and state forests and also includes provision for financial incentives for forest activities. In both cases the private and state forest resources have increased in size and quality over the past decades.
So what recommendations can be drawn from these divergent examples? At least initially, there appears to be a need for rules and regulations through forest legislation, and arrangements for enforcement of that law. But this has to be complemented by carefully considered financial incentives and other supports, such as extension and training. The enforcement of the law, moreover, has to be balanced with the need to cooperate with private individuals and local communities as important users of the forests.
The responsibility for controlling and enforcing forest law in former CPEs most often falls to the government body responsible for state forest management. This means that, in addition to controlling their competitors, namely the non-state forest owners, they also have the role of controlling their own practices. During an interim period, this may have to be accepted for reasons of cost and available human resources but, in the long term, these functions should be separated, as is the case in Slovakia (see Box, p. 22) where the District Forest Boards are in charge of the monitoring and control of state and non-state forests, while the management of state forests are managed by the State Forest Service. In Poland, a separate independent entity within the state forest administration provides the control and audit functions. On the other hand, forest extension in Poland is carried out by the state forest administration. In Sweden, with over 50 percent private farm forests, the control functions of both private and state forests and the extension to farm forests are carried out by a forest board. The state forests are managed by an autonomous state-owned enterprise.
The best solution regarding the control function for countries in transition is likely to be a gradual shift towards separate responsibility for management and control. The pace of this shift would depend on the pace of privatization and the available financial and human resources.
Human resource development
The human resource base in central and East European CPEs normally has a higher number of graduate foresters (forest engineers) and a lower number of forest technicians than that in Western Europe. This can be seen both as a liability and an opportunity. It means that there is a human resource base of forest engineers to take up the new functions that the introduction of market economic conditions will require, but it also means that the forest engineers are likely to undertake tasks that could be accomplished by staff with lower qualifications.
A prerequisite for tackling this problem is the preparation of a human resource plan. This would start with an analysis of tasks under the former CPE system compared with future tasks under market economic conditions, and the identification of required changes. This would then be matched with the present staff skill profiles so that the required in-service training and education requirements could be established.
The outcome of the human resource plan is likely to be a substantial training and education programme that will rely on a combination of in-service training, international studies, training of trainers and foreign technical assistance. The main emphasis would be on economics and social sciences, including participatory management and extension approaches, but technical and forest management principles would also have to be revised to reflect changing conditions better.
In particular, the human resource plan may conclude that there is a need for more education and training at the technician level. This would be particularly important for the development of forest extension services but would include all other technical and social aspects of forest management.
FAO investment Centre personnel assisting a national project preparation mission in Slovakia
The relative isolation of foresters in many of the former CPEs has contributed to a need for exposure to conditions in market economies. This can be accomplished through foreign training, study tours, membership in international organizations, twinning arrangements between local and foreign training and research organizations and through foreign technical assistance.
There is also an important opportunity to draw on experiences between the former CPEs themselves, similar to programmes of Technical and Economic Cooperation among Developing Countries. This can be accomplished through bilateral agreements but a lack of financial resources often limits this opportunity. It is therefore urgent that provision for such assistance be made as part of foreign assistance to these countries.
The main and obvious need in countries in transition is to retrain a human resource base to be able to operate more efficiently under market economic conditions. This mainly refers to the lack of knowledge and experience in economic applications to forest management and business administration but it also refers to the lack of experience in decentralized decision making. The foresters are not trained for or used to taking management decisions; they are trained to implement plans prepared by a special planning team.
Another main area where new skills are required is in forest extension and training. This area includes management of private forests, joint management between the state forest service and local communes of forest areas in their vicinity and management of trees on private farms. All this requires skills in sociology, public relations and communication and farm and household economics as well as forestry techniques applied to these conditions. It is noteworthy that not only is this a technical training issue but one that will also require a change of attitude.
Training of forest research officers is also important. In former CPEs, forestry research has often been given high priority, including substantial funding for staff and equipment. However, this has been paralleled by a "blind" adoption of recommendations as technical norms without appropriate economic scrutiny. For example, standards on spacing, pruning and thinning, recommended by forestry research organizations, were established based on administrative prices and without using discounting techniques to compare costs and revenues with substantial time lags. Such standards need to be revised, based on free market pricing and modern economic principles. This will require substantial in-service training of the research officers, particularly in forest economics, but also in modern research technologies and management.
When transferring from a centrally planned to a market economy many forestry functions are likely to be decentralized. This will create a demand for services to new operators, such as extension advice to emerging forest owners, and will also introduce a need for better national monitoring and control functions. Therefore, should management of the forests be decentralized (including privatization of forests), there may be a need for a system of national forest inventories to establish an AAC and control forest management. Likewise, with management of the state forests delegated to an autonomous enterprise, and given the increasing area and number of private forests, there is a need for well-defined laws and regulations to ensure that the forests are managed in the interest of society.
The emerging new forest owners require assistance through a forest extension service. This, in turn, calls for in-service training of the present staff (and new staff) to fulfil these functions. Furthermore, investment in forestry development in temperate areas does not easily attract private investors unless financial incentives are offered.
State forests are likely to be more efficiently managed within an autonomous enterprise that is set up with clear mandates, including sustainability and environmental guidelines, and then operated according to business principles.
One of the most crucial differences between a centrally planned and a market economy is the system of pricing. With the introduction of market prices, there is a possibility to allocate resources according to supply and demand. It is possible to evaluate the efficiency of different production alternatives based on comparable costs and prices. There is also increased competition leading to more efficient production systems.
Policy options to achieve stated objectives could conveniently be analysed through a policy option matrix (see Figure OBJECTIVE: Improve the efficiency of and income generation from the forestry sector).
The human resource base in former CPEs is strong but often ill-adapted to market economic conditions. This situation requires a human resource assessment on which a restructuring of staff functions and substantial in-service training can be based. In particular, this will result in an increased emphasis on the application of economics and business administration in forest management.
Forest administration policy options matrix
OBJECTIVE: Improve the efficiency of and income generation from the forestry sector
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Issue |
Policy options |
Likely advantages and implications |
Likely disadvantages and implications |
Comments |
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Organization of the forest service |
Forestry administration as a department within the line ministry |
· Convenient organization in CPEs |
· Cumbersome administrative procedures |
This option can be substantially improved if provision is made for the service to retain all or most revenues for forest maintenance and investment |
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Management of state forests through an autonomous (state- owned) forest enterprise |
· Possibilities for business-like management
according to well-defined rules |
· Possible risk of too much emphasis
on financial rather than sociological and environmental benefits |
This option has to be accompanied by clear laws and regulations that present the framework within which the enterprise can operate |
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Financial arrangements for the forestry service |
Revenues directly to the state treasury and financing through yearly budget allocations |
· Flexibility to use forest revenues for expenditures in other sectors |
· Demonstrated risk of insufficient funding
of maintenance and investment in forestry |
This is one of the most common problems of maintaining sustainable forestry around the world |
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Forestry administration as a department within the line ministry but part of the revenues set aside as a fund for forestry maintenance and investments |
· Increased security to carry out necessary investments |
· Reduced flexibility for the treasury |
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Forest revenues retained by the forest service to be used for recurrent and investment expenditures |
· Financial security for sustainable forest management and to take advantage of profitable investments additional funding required for larger investments which cannot be covered by revenues |
· Risk of less willingness of the government to provide |
This should be the preferred option for the future |
(cont.)
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OBJECTIVE: Improve the efficiency of and income generation from the forestry sector |
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Issue |
Policy options |
Likely advantages and implications |
Likely disadvantages and implications |
Comments |
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Administration within state forest service |
Management based on centralized budget and decision-making |
Potentially good planning and control |
· Limited incentives to improve efficiency |
This option is no longer practiced in former CPEs |
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Decentralized management with responsibility, accountability and profit sharing delegated to local units |
· Increased local knowledge and adaptability |
· Reduced possibilities for central direction |
This requires additional management training |
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Privatization of activities (mostly processing) that can be more efficiently undertaken by private enterprises |
· Increased efficiency through private
profit incentives and less overhead costs |
· Potentially less state revenue |
These activities are particularly suited for small enterprises |
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Arrangements for sale of forest products |
Sale of standing wood at administered prices |
· Easily projected revenues |
· Risk that revenues do not reflect the
market value of the wood |
This option has resulted in stumpage prices below, and in many cases substantially below, market values |
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Sale of standing wood through auctioning or bidding |
· Revenues reflecting market values under
free competition |
· Risk of theft |
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Sale of wood at roadside through bidding |
· Better potential to receive high (market)
prices |
· More state investment requirements |
This option could be combined with development of private logging contractors to increase competition and reduce costs |
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(cont.)
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OBJECTIVE: Improve the efficiency of and income generation from the forestry sector |
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Issue |
Policy options |
Likely advantages and implications |
Likely disadvantages and implications |
Comments |
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Pricing |
Stumpage and other prices based on centrally determined levels for transfer between state enterprises and for retail |
· Convenient system in CPEs |
· Prevents rational decisions on resource
allocation based on real costs |
This option is gradually being abandoned in former CPEs |
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Establish a minimum stumpage price based on recovering all costs associated with sustainable forestry and reasonable land rent |
· Provision of financially sustainable
and self-sufficient forest production |
· Risk of high consumer prices and internationally
uncompetitive processing industry |
This could be a first step towards free pricing |
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Pricing of goods and services through auctioning or bidding |
· Prices and profits based on balancing
of supply and demand and what the market can accept |
· Risk of collusion between contractors and bidders, which would reduce prices |
Risk of collusion could be offset by having established minimum prices |
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Long-term wood delivery and price contracts with wood processing enterprises |
· Increased security for the wood processing industry, allowing long-term investment policies |
· Reduced possibilities to reflect future demand-supply situations because of predetermined price adjustments |
This may be a prerequisite for attracting investments in wood processing |
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Wood sales based on offering concessions to the wood processing industry |
· Reduced state involvement in logging
and road construction, therefore less staff and investment needs |
· Risk of unsustainable and environmentally
unsound harvesting for commercial reasons |
This option should be avoided because of the number of risks involved |
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